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Moving 211 Tons of Gold

The security problems associated with moving $12B in gold from London to Venezuela.

It seems to me that Chávez has four main choices here. He can go the FT’s route, and just fly the gold to Caracas while insuring each shipment for its market value. He can go the Spanish route, and try to transport the gold himself, perhaps making use of the Venezuelan navy. He could attempt the mother of all repo transactions. Or he could get clever.

[...]

Which leaves one final alternative. Gold is fungible, and people are actually willing to pay a premium to buy gold which is sitting in the Bank of England’s ultra-secure vaults. So why bother transporting that gold at all? Venezuela could enter into an intercontinental repo transaction, where it sells its gold in the Bank of England to some counterparty, and then promises to buy it all back at a modest discount, on condition that it’s physically delivered to the Venezuelan central bank in Caracas. It would then be up to the counterparty to work out how to get 211 tons of gold to Caracas by a certain date. That gold could be sourced anywhere in the world, and transported in any conceivable manner -- being much less predictable and transparent, those shipments would also be much harder to hijack.

[...]

But here’s one last idea: why doesn’t Chávez crowdsource the problem? He could simply open a gold window at the Banco Central de Venezuela, where anybody at all could deliver standard gold bars. In return, the central bank would transfer to that person an equal number of gold bars in the custody of the Bank of England, plus a modest bounty of say 2% -- that’s over $15,000 per 400-ounce bar, at current rates.

It would take a little while, but eventually the gold would start trickling in: if you’re willing to pay a constant premium of 2% over the market price for a good, you can be sure that the good in question will ultimately find its way to your door.

Oh, and it seems perfectly insurable to me. 211 tonnes of gold is about 211*1000*32.15(oz)*$1900/oz=$13bn. The Lockheed C-130 is a fairly proven transporter of goods and can take 20 tonnes at a time, so you'd need 11 flights. Flight time is 4656miles/335mph=about 14 hours. C-130s crash at one to 25000 hours flight time, so you've got a 14/25000 ~= 5.6*10^-4 probability of crashing.

At this point a less lazy underwriter than me would work out the expected loss, but since the probability is so low, 11*5.6*10^-4*13bn/11 = $7mish. Load for expenses, profit, and safety margin, and you're done.

Note also that most crashes happen on take-off or landing - ie, on land - and therefore this premium is actually pretty conservative.

There are also plenty of companies that would take this on. Underwriting large risks is not exactly unusual, and while this is larger than most, it isn't outside many cat reinsurers risk appetite.

The article estimates ~40 trips. I'll leave it for you to fight it out with them.
Your analysis ("Load for expenses, profit, and safety margin, and you're done.") breezes over the point of the article.

The point of the article is that the expenses and security margin go up (waaay up) because the risk of loss is _not_ the risk of a crash; once you start an advertised series of billion dollar transfers (on 10 trips) the risk of theft becomes severe.

1. Remember that episode of _Beverly Hillbillies_ when Granny wanted to see her money? Chávez doesn't need to do more; merely by threating to take delivery Chávez causes great difficulties for the Bank of England.
2. Even if the Venezuelan Navy is loyal and excellent defenerds theft isn’t the only problem. Chávez’ enemies can simply torpedo and sink the gold thus destroying the Venezuelan economy.
3. Trusting ‘standard gold’ bars got Ethiopia into trouble, no? [ http://news.bbc.co.uk/2/hi/africa/729466 5.stm ; http://www.popsci.com/diy/article/2008-0 3/how-make-convincing-fake-gold-bars ]

Who's got $700,000 that they can afford to briefly turn in to a gold bar, but would still be tempted to do this for a further $14,000? Assuming you plan to take the 12 kilo gold bar through in hand luggage, it's going to be one spectacular hold-up at the security line. Someone's definitely going to notice that you've got it, quite possibly someone who could phone a friend in Caracas to meet you at the airport.

The first time I read the crowdsourcing suggestion I thought it would be an absolute nightmare dealing with impurities. When I reread it I realized the suggestion is standard gold bars. But this seems even more unrealistic. I either did the math wrong or the crowdsourcing idea is just ludicrous:

Standard bar = 400 troy ounces
Price per troy ounce = $1700

400 * $1700 = $680,000.00

How many people are going to have a gold bar worth $680k lying around in Venezuela?

the reason he wants physical delivery is the same reason as anyone else who has substantial physical gold holdings: someone claiming that they do indeed have your gold is not equivalent to you actually having it. the EU and US are not exactly models of fiscal stability and responsibility lately.

there is nothing to stop someone from giving multiple certificates of deposit for a single unit of gold. the entire banking system is predicated on trust, so this all comes down to "does chavez trust these banks?". the answer is clearly "no, hugo chavez does not trust these banks".

it is not reasonable to expect that the venezuelan citizens have anywhere near 211 mt of gold to exchange for currency with the govt. the only reasonable way to do it is in several shipments spread apart to hedge against loss in transit e.g. first of N shipments goes via plane, second one only leaves after the first one arrives.

Antonov An-225 could transport it in a single flight, but it would need refueling somewhere along the way, or it could be transported with two flights without refueling. Getting the gold into the airplane is actually more trouble than flying it once loaded, since it has to be transported in smaller batches, due to weight constrains regular roads impose.

It seems everyone only considers external enemies to be threats for this gold. What Chavez should be really worried about is that his own navy or aircraft pilots will take gold and disappear with it on the way.

One has to plan for how one would sell this gold, and presumably a future buyer would have the same difficulties in physically transporting the gold out of Venezuela (assuming, like Venezuela that a future purchaser would also want physical custody of the asset)

Therefore I'd have thought it strategically more beneficial to keep the gold in Europe than transport it to South America where the future physical sale opportunities to neighboring countries are small.

The one caveat I'm trying to consider in my mind is whether this gold is being purchased to underwrite the printing of currency - but given the Venezuelan economy I'm not even sure if their currency is tied to gold reserves, and even then - the gold only needs to be under the government's control, not physically in their possession.

Gold in a vault in London will have a detailed record of ownership and will have had its purity analyzed at some point. If Chavez allows anyone to deposit gold in Caracas then they will have to assay every single piece.

It seems pointless to hire someone else to do the job if he has a Navy and Air Force at his disposal.

Setting aside the customary gold-nutcase "hard money" bullshit, which ordinarily need not detain a working mind, and therefore conceding for the sake of argument that someone might reasonably wish to store wealth in exclusively in gold...

...Why would Chavez care _where_ his appreciating stock the gold resides? Any transaction that his government might care to negotiate can obligate any or all of that gold without needing to move an ounce of it. Moving it does nothing but reduce its value to the tune of the moving expenses.

If he's worried about the BOE freezing Venezuelan assets in consequence of some future international fracas, he could arrange for Russia (say) to assume ownership of the BOE gold in exchange for gold in some Russian vault, plus consideration amounting to a tiny fraction of the sums being discussed to actually move the stuff to Venezuela. Then he can go on being an international proctological affliction in perpetuity, so long as he doesn't annoy the Russians, without risking any of those assets.

And he's _proud_ of his acumen. He brags about it. It's like watching a footballer who's just scored an own-goal running around the field with his arms outstretched yelling GOOOOAAAL!!! What a yutz.

Swapping real gold (in hand) for a paper equivalent (even backed up by real gold in Bank of England) does not seem to me to be a good deal at all... and 2% is way to low to convince people to replace gold with paper.

First you melt it down. Then you use it to build a 600-foot-long Mammoth car. Paint the car red so nobody can recognize that it is actually made of solid gold. Enter the car in the "No Limit World Race" because this will give you a good opportunity to sneak it across the border without much inspection. Also, you can actually try to win the race by smashing all the other cars off the road. Your primary goal might be to get away with the gold but there's no reason you can't also win the race.

Here is why he might want to do this: He plans on screwing over a lot of people in a lot of places. If he was to for instance nationalize (read steal) certain companies, there could be a judgement against Venezuela. Of course Venezuela being a sovereign state could simply ignore the judgement. However at that point, Venezuela's creditor could call up the Bank of England (or some other place holding Venezuelan gold) and say: "They owe us X dollars. Please transfer X dollars worth of gold from their account to ours." However, if the gold is in Venezuela, you can't do that. Of course, that's a very good reason to preemptively stop doing business with Venezuela and divest yourself of assets under Venezuelan control. In general, it's a bad idea to do business with someone who does not have assets in a jurisdiction you trust.

How about following de Hevesey's example with the Nobel Prize medals in Nazi-occupied Denmark, and dissolving the gold in aqua regia? (Hydrochloric and sulphuric acid). Then you just have to transport tons of a highly toxic, and valuable, liquid.

The security comes from the fact that stealing this amount of toxic chemicals is going to require some technical skill. Then processing this volume of toxic chemicals is not going to be easy to conceal - unlike melting gold bars.

I wonder what the international shipping regulations are for aqua regia?

If this is, in fact, political theatre and showmanship for the sake of Chavez, the obvious answer is to *pretend* to move the gold.

That way the Bank of England can *pretend* to have it available, the Navy can *pretend* to sail it across the ocean, and thieves can *pretend* to stage a heist. The only problem to be solved is "How to keep one man from finding out it didn't actually happen."

Happily, that turns out to be a far more tractable problem than the original.

@Richard Steven Hack:
"PrometheeFeu: Or he simply doesn't want to end up like Gaddafi...attacked for no reason and all his assets frozen, then handed over to the rebels in exchange for oil rights...
In general, it's a bad idea to do business with someone who covets your assets...as Gaddafi found out."

I'm pretty sure Gaddafi was not attacked for "no reason". As far as his assets being frozen, I think that only happened after he lost control over about half of Libya. That's also when NATO allied with the rebels. I'd like to understand your point though: Are you saying the Hugo Chavez is afraid that his population will rise up against his bloody dictatorship and that the US will bomb him?

I agree with PrometheeFeu. Chavez has already had trouble with multinationals seizing his foreign assets in retribution for his seizing theirs. The only way to break this chain is clearly to make sure he has no assets in other nations to sieze.

I also expect a lot of the money to vanish. This is the guy who claims that Venezuela mines 10T/yr, plus another 10T/yr of illegal mining. He runs an effective dictatorship, and somehow you can mine 10T of gold under his nose? I suppose if they were REAALY gold-rich, you could have a lot of people doing small scale mining of high quality ore... but I'm not sure how you illegally mine and smelt tons of gold-ore a month without someone noticing.

I'm about to do some serious pruning on this thread to remove the digression on economics. Please focus on the security issues, and please keep it civil.

In particular: Richard Steven Hack, you may not ever fling insults at people on this blog the way you did in your comment of 10:43 PM. I don't care what the circumstances are. This is your only warning; next time, I will ban you on the spot.

I think the problem here is confusion about the sending and receiving parties.

As I understand it, Alice wants to send a message consisting of several tonnes of gold to Bob while ensuring that Carol does not intercept the message.

I read a large red book once that was full of ways of making transfers like this. Title was something like Schneier on Security.

The problem seems to be that Alice & Bob are both the same person. If we assume that Alice and Bob are caused by multiple personality disorder in Hugo then we can treat them separately thus reducing the problem to one that was already solved in that book and can move on to the next problem.

Agreed. Calum questioned why anyone would want gold in the first place, and a lot of us jumped on that, because he implied that Bruce's topic was moot.

Security solution: Overland is probably safer than sea or air. So, sell the gold in London, bit by bit, over time, and buy from dealers in Canada, US, Mexico, and whatever there might be in Central and South America. Chavez can pay the armies of each country to guard the shipments, or, with permission from the host countries, send his own army and air support.

The last idea of the article isn't good, because you need too many individuals with smaller amounts of gold, each of whom bears the same risk. Carrying ten or twenty ounces at a time, by obscurity, might be OK, but I'd expect thieves would monitor the roads leading to the gold window. And you need too many such people. Those with larger quantities face the same higher-risk threats, and the 2% bounty might not be enough for them to hire what they deem satisfactory security.

Better to use huge shipments that justify huge security. Economies of scale apply here, as elsewhere.

Okay, I've removed the digression on why gold is valuable. I left some comments that touch on politics or economics, but nevertheless, please focus on security from here on out.

(I know some of you were just continuing a digression that was already well underway, and in fact I removed one comment that amused me quite a bit.)

Tommy,

I see that the paragraphs about gold you posted were a cut-and-paste from the song parody site that you are not allowed to talk about here, and that your sig was a link to the page on which they appear.

We've been over this repeatedly. I've asked you to stop looking for loopholes that allow you to bring up your writings on that site. And in fact, when I mentioned examples of why your references to that site are not appropriate, one of them involved contributing to an off-topic discussion of economics. It seems there's nothing I can say that will keep you from doing essentially the same thing in a slightly different way. So, as I said last time, I'm going to put the domain in the spam filter.

You are still welcome to comment on the blog without the link, but please stay strictly to security topics from now on. If you see others getting away from security, don't contribute. You've used up your leeway at this point.

Isn't this just returning some of the gold that left the New World in the first place?

The source article indicates that it's actually 99 tons of gold at Bank of London. This is the weight of three armored fighting vehicles, or five C-130 flights.

This is not actually a hard problem, but I don't like Hugo Chavez or the present Venezuelan regime. I really like the idea of someone's highly deniable submarine torpedoing his economic future; same argument applies to aircraft.

The three approaches I see are:

1) Ship it aboard a cruise ship, preferably one full of otherwise harmless US and UK nationals. Hostages who pay to _be_ hostages. Even publicize the event; "Ride with $12 Billion!" Obviously a mutually distrustful troika of Venezuelan secret police, military special operations, and revolutionary cronies would serve as guards -- all with loved families at home.

Well worked out, the US and Royal Navy would have no choice but to quietly keep tabs on the cruise ship, against their preferences.

2) Work out a swap with the Russians and have the delivery done by a small Russian fleet. The Bear still has a long reach. Perhaps the Chinese would like an opportunity to play?

3) Book thirty C-130 flights. Five to ten of them are gold flights. The rest are carrying orphans, refugees, diplomats, tourists and/or a mix of the above.

Hmm. Selling the gold in Europe and re-buying it in the Americas might work for lesser amounts, but it'll create an imbalance. In other words, somebody will move the gold across the pond, as soon as the price difference is large enough.

I suspect that this way of outsourcing the problem will me more costly than moving it themselves, because in addition to the (eventually) lower price in Europe they'll have to pay commissions for the transactions. I don't know how high these are when you're talking about that kind of volume, but they're unlikely to be zero.

I guess there is still a big empty storage site in the Philipines. I vaguely remember it being called "Bundok" or something to that matter. Maybe I can provide a WWII submarine, if you don't mind using Nazi technology.

In WWII it was more effective against submarines to move in large convoys.

First, buy several tons of tugnsten, put it in closed and difficult to open containers, the same as the gold ones. (Security by obscurity)

Use 50 - 60 cargo ships to transfer the containers, and some escort ships. Some of the container ships are decoys.
(don't put all your eggs in the same basket)

In addition, to protect against an insider job, sunk one of the decoys cargo ships so every cargo ships see its. (security by increasing the drawbacks)

Now for the cargo ships crew it is clear the pros and cons of cheating. There is still the chance that everybody decides to cheat, but I think that with the right hostages in Venezuela this risk can be reduced.

If a conventional attack is carried out against the convoy it does not have a 100% chance of success. However, the option of a nuclear weapon detonating in the ocean is still present (DOS attack), but at least it reduces the number of people who can do it. However there is a better option that sunking the cargo, it would be to attack the com system of the escorting fleet, sunk it, and get all the cargos, I think that it is not difficult for some countries to do it.

@pluom: nice, but even bitcoin is easier to steal than an ounce of gold, considering the ease of getting a Trojan installed. And that's just consumer grade malware, imagine what three letter agency malware can do.

I have to side with those who think Chavez's ploy is to test if the BOE actually has the gold. And possibly make himself a bit more immune to frozen assets. Of course, if he gets his nation sanctioned, how much can that 12 b exchange for on the black market? 8b? 10b? Or even less?

Also, considering the gold is already in British hands and close enough to US hands, it would either have been tampered with already, or no one really cares to steal it. I would say 12 b in gold in venezuela would actually make a coup against Chavez a greater risk, because the victor could easily slip away much of that gold and claim it was lost in the fighting or due to looting by Chavez's forces.

It does not matter who the actors are because the actors are mutable due to the laws of ownership... Chavez can take responsibility for moving the gold or force the banks to do so because they have to maintain a certain level of trust in the redeemablity of deposits. So the problem really breaks down as: don't move (e-coin/transfer to russia as trusted depositor), move in many very small loads many times (crowd sourcing/trade imbalance), move in a few large loads (airplane) or in one huge load (ship) each has risks/costs and it sounds to me like it is an optimization problem.

I think one important thing (certainly touched by many other comments) is to realize that not all possible counterparties are equal. By bringing more counterparties to the equation, you are assuming more counterparty risks.

Presumably the reason why Chavez wants to repatriate the gold is that he believes there is some (security) risk to having it in the custody of BoE, i.e. a counterparty risk that he wants to eliminate. In the repo scenario, for example, the party they sold the gold in BoE vaults may fail to deliver them to Caracas.

Taking such risks seems to be contrary to the only reason I can imagine why Venezuela wants to have that gold at home (they may certainly already suspect whether their gold is fully backed by physical storage), although I cannot claim to understand their motives.

In these amounts the gold market is illiquid enough that even a monetary settlement enforced by a court against a well-funded middle party is unlikely to guarantee recovery of the full amount of the physical gold. And they want to keep the gold, not sell it.

One high risk / high value cargo is nuclear fuel. This seems to be transported in a single shipment on a specially modified vessel (eg Pacific Heron). News reports vary (probably deliberately) about whether the ship and its guards are armed. It seems reasonable that those governments with the capability will monitor the vessel en-route. So, you might take over the vessel, but getting away with a nuclear cargo is probably beyond all but a nation state. (When's the annual movie plot contest this yea?)

The question for the Venezuelan government is are you more worried about your crew sealing the gold, or a blue ocean navy intervening? (Having checked, the Law of the Sea gives you reasonable freedom from the latter.)

One other interesting case are the Spanish treasure fleets from the New World in the C16-C18. The Spanish admiral de Avilés developed a convoy system, and it was only once the volume of trade decreased in the late C18 that bullion went back to being carried on individual warships.

So, an armed convoy with the gold divided among the ships might be a good approach. You get the ability to chase a defector as a 'pirate ship'. The key security requirement becomes avoiding collusion among the crews.

Many people discussing the risks are missing the point. Insurance isn't so nice because Chavez wants actual gold. It isn't a mere optimization problem because there's a huge subversion risk regardless of the transport method. The risk is greatest when moving large volumes of gold across the sea: there's quite a few countries with submarines. The problem for Chavez is how to move the gold without the United States or its allies causing Chavez to loose the gold in a deniable way. All I know for sure is that the method would be costly (maybe as much as 5%-10% of the gold) and involve cooperation with several nations.

@Roy - Interesting comment about the speed of sound in W vs Au. There have been several comments about having to to assay the gold to make sure it wasn't adulterated - some stolen and weight/size made back up. From the quick check I made, most assay methods, if done thoroughly, are either destructive or at least highly disruptive. (smelting) It leaves me wondering about using sound propagation characteristics as a method. That leaves a few questions... How sensitive to impurities, whether Au characteristics can be mimicked by alloys, (and whether any of those alloys would have gold-like density) etc.

I don't understand the distinction between economics and security. To me, security is the practice of making it cost more to obtain a thing than the thing is worth.

This leads to some potentially novel solutions. For example, dumping the gold on the market might reduce the value enough to allow later repurchase at a cheaper price, and also making it less economically viable to steal the gold. Or, what about shooting bankers who buy gold? If it costs your life to own it, would you buy it?

That was part of my own scheme. It would be ships protected by.subs or actual russian cargo aircraft. However, we've sabotaged and subverted russian equipment and personnel before. My scheme has guards and observation craft from a few different neutral countries to increase trust factor. Although idk bout $20 mil. It still pays off to "loose" a shipment somehow. The transfer deal will require a substantial gain fir the mob-owned russian government.

How about asking the US Navy (or anyone of the major navies) to transport it for a fee of 1% of the gold?

If the US Navy accepts, they will make very sure they don't loose any of the gold (embarrassment factor) and they can use one of the bigger war ships which makes hijacking very unlikely. Give the US Navy looses very few of their ships, the risk of loss is fairly low.

@Nick P
I don't think it would be a problem for Russia. Going by most comments here I don't know if people are being tongue in cheek or they just can't get past the official stereotypes of Chavez, Venezuela and the Russians.

These countries protect a lot of valuable stuff already. This should be no problem. The Russians mob govt or not have not lost a nuke yet. (I mean a warhead not a few grams of some dual use stuff).

Venezuela could move this stuff itself, were it not for the threat of the US, UK and France. Those three might not be able to resist the temptation given a nice big juicy gold shipment. Any one of them would sink it for the lulz.

For anybody to steal this if it was on a navy ship, they would have to take the ship out on the high seas and then sail it to some port. The whole world would know this was happenning, they would probably have a CNN escort as they came into port. How would any country justify not capturing them and returning the gold?

No. I think the only chance of trouble is economic sabotage by the aforementioned countries, done in such a way as to be undetectable and deniable, out on the high seas, over the Marianas trench.

For that the Russian navy would more than suffice to meet the threat. Remember the only benefit to such sabotage is to embarrass Chavez. It would not bring down the Venezuelan economy or even Chavez. I don't think the US or France or the UK would do it if it carried the risk of tangling with Russia.

Just because so many people here and at the linked article are expressing what IMHO are stereotypical opinions of Chavez here is a link to a meeting Chavez held in Venezuela as retold by Richard Stallman who was present.Encounter with President Chavez

"These countries protect a lot of valuable stuff already. This should be no problem. The Russians mob govt or not have not lost a nuke yet. (I mean a warhead not a few grams of some dual use stuff)."

Actually, they have. Not to mention they are the ones accounting for what they officially have. Those "facts" are not trustworthy. And there's a difference between loosing one's nuclear capability & stealing another country's gold. A huge difference. You might as well have not even mentioned nukes.

"For anybody to steal this if it was on a navy ship, they would have to take the ship out on the high seas and then sail it to some port. "

Well, there's stealing it and preventing chavez from getting it. both are useful if the goal is to embarass chavez. The first is doable for US intelligence. This means we must consider both.

"For that the Russian navy would more than suffice to meet the threat. Remember the only benefit to such sabotage is to embarrass Chavez."

Maybe. You're thinking like a sane person. You need to think like the kind of person who works in DOD or Soviet command centers. These are the people who thought they might win a nuclear war and who staged all kinds of coups and sabotages that didn't work out. I mean, the War in Afghan is a distaster that's caused us tons of problems but the country did it, right? Logical thinking does not equal to thinking of the military industrial complex. Of any major power.

"I don't think the US or France or the UK would do it if it carried the risk of tangling with Russia."

You still didn't address the possibility of Russia being involved in a scam to get them billions of dollars worth of gold. Most of the major NATO players will hate Venezuela. What if Russia thinks it can tag team on Venezuela with their help?

"Going by most comments here I don't know if people are being tongue in cheek or they just can't get past the official stereotypes of Chavez, Venezuela and the Russians."

So far as security is concerned, there are no stereotypes. You are confusing politicians propaganda with how things actually work. Chavez is saying what people want to hear, doing some of what makes it believable, and then otherwise doing what he will. The Russians are known to support criminals and spy on people with valuable intellectual property (see leaked MOD security manual). The Russians can't be trusted. The Venezuelans can't be trusted by themselves (or they'd move the gold themselves ;). The Americans can't be trusted because Chavez is their enemy & the gold is in NATO's hands. Hence, the situation is more complex than u think it is. These kinds of things often are, though.

I keep coming back to the fact that gold is fungible as pointed out by Bruce Schneier in his introduction (And Karl Marx went into great length in Das Kapital about how (in ecomomic terms) 2 oz of gold was exactly the same thing as 1/4 of wheat) . This means that in economic terms it doesn't matter if Chavez gets the same physical gold in Caracas as exists in London or the same weight of different gold.

The most secure way to move the gold is not to move the gold. Chavez controls deposit certificates for an amount of gold. Other players have gold they would like to deposit somewhere safe. Some of these other players are close to Venezuela and would find it easier to move their gold to Caracas and on depositing the gold at the Caracas can be given a deposit certificate for the gold.

Normally on a gold deposit they would be given a deposit certificate for the bank where the deposit is being made which is presumably why they wish to deposit in the Bank of England / Spain / Switzerland etc . In this case Venezuela can give them one of their own Bank of England deposit certificates and everyone is happy.

Caracas has physical gold

England has physical gold

The 3rd party has a Bank of England deposit certificate.

The risk of transport was the 3rd party's

The 3rd party had to move the gold a shorter distance and so encountered less risk

what he could do is set up a different type of gold exchange, with black gold. Petroleum is equally fungible, and his country has tons of it. He could sell the gold for cash in London, and anyone who wants can sell it back in Venezuela for a discount in oil. That way, they get to keep the cash and the gold.

@emk: sorry, it's gonna take much more than that to convince the son of Cuban immigrants that theres anything good about Chavez. Also, nothing good comes out of any leader who stays in power forever and takes any opportunity he can to seize more power. His BFF Fidel made quite a killing turning his country into his plantation. Whether or not Chavez has the intention of going as far, he does play the usual petty dictator games.

You know, this does make me think about something. Every government and economic system or idea was usually proposed/established to either protect the interests of those in power or to protect fairness. A societal security system. Of course, regardless of the origins intentions, each system is often leveraged by those who wish to profit at the expense of others, or those who wish to gain or consolidate power. All one has to do is look at every form of "free market" and "socialist" system in the past 200 years. I recall having to read Bellamy's Looking Backward back in school. His idea was to create an egalitarian and socialist society where there was no opportunity and thus no incentive to unfairly gain against others, as the robber barons were doing at that time. A noble but fallacious idea, which most political and economic systems fall prey to. I'd be interested to know if Liars and Outliers gives a treatment to this angle, including an evaluation of previous ideas of creating a "fair and perfect" system.

@Nick P
You make a fundamental assumption about the trustworthiness of the Russians and the Venezuelans. I don't accept that assumption so I really can't say anything about your points.

But whatever scheme is adopted, somebody will have to be trusted. Any counterparty can always scam the Venezuelans.

@Gabriel
Nothing may convince you of anything good in Chavez but the facts are he is in office legally. He has repeatedly won elections by large margins. Elections which have been observed very closely by international observers including the Carter Center. It is, in fact, the opposition that has acted illegally by collaborating with a foreign power to overthrow his government and then abolishing constitutional institutions. He has not been in office too long, as he his still serving his constitutionally permitted term.

You may not like his policies but he is well within right and legality in pursuing them and if the people of Venezuela support them, who are we to disagree.

"You make a fundamental assumption about the trustworthiness of the Russians and the Venezuelans. I don't accept that assumption so I really can't say anything about your points."

Assumption? Maybe about the Venezuelans, but not the Russians. My distrust of the Russian government & military is based on their actions. For one, they have more spies in the US today than ever before stealing our secrets [1]. Second, organized crime is tightly connected to the government [2]. Third, they often appear to protect big time crooks rather than prosecute them [3]. So, I simply ask myself: "Given this and other things I know, would I trust them with over ten billion dollars worth of my gold?" I think not!

@Moderator: Understood, I don't think anyone is deliberately intending to divert the thread. Perhaps one of the sticky issues are some of the following questions that are related to security, which require understanding intent of all the players:

Why move the gold? What are the risks of keeping it in London, vs. moving it to Venezuela?

Who would actually have an interest is sinking/stealing the gold (and what would be the gain/fallout from such an action)?
We would have to know who the threat/attacker was. When it comes to international politics/economics, it gets very sticky, we still don't know who actually wrote Stuxnet for example. There may be likely suspects, but any player in the game could have done it for a variety of motives.

Would any foreign actor actually want to steal the gold?
If there is no state of war, or "cold war" going on, it doesn't seem to make sense to steal or sink it, particularly what is to gain vs. the international fallout. If stuxnet were proven to be US malware, the fallout would be much less than dropping bombs on Iran, but if the US or an ally were to torpedo or steal the gold?

In such a case, just quietly load it into several naval convoys. Distributed to mitigate against risk and accidental loss. If he doesn't trust his navy with 12B worth of gold (in smaller shipments), then he has massive problems. I don't think a US Army soldier would get too far if they tried to steal gold from Ft Knox, they'd wind up with lead or jail time. Additionally, others have suggested ensuring that sailors closest to the gold should have strong ties in Venezuela. To further ensure safety, he could hire some Russian destroyers as escorts, similar to what some others have suggested. But keep venezuelans on the ships carrying the gold. I don't recall any issues with the Ft Knox gold deliveries in the 30's, which took place during a much worse economic depression. Those were shipments on land across the US, which make a prime target for hijacks, but they went well.

If anyone knows of any credible threat, besides some (high fallout) attempt by international superpowers to sabotage Venezuela, let me know. I don't think any form of modern pirate could take on even the Venezuelan navy in a well organized convoy.

@Nick P
Of course there is corruption in Russia thats not the point. You can find examples of that here in the US.
However, even societies where official corruption is rife are able to secure most things that are important to them. ANd business corruption is very different from stealing 200 tons of gold plus the destroyer its sitting in.

If one takes the attitude you do how can you then explain that Russia is able to keep anything of value out of the hands of the mob?

They have thousands nuclear/conventional weapons, military hardware, aircraft, spacecraft etc all worth millions at least to a potential thief. Yet they are able to secure them, in the midst of all this corruption.

The fact that the gold has a market value of 12billion means little from the perspective of stealing it. It may as well be 200 million. This is because the real issue is one of how do you steal it?

The idea that the Russian govt would simply take Venezuela's gold is just imagination. The idea that a rogue military faction would do this on behalf of say the mob is a really remote possibility.

If one accepts (as I believe they must) that Russia is capable of securing anything they want to secure no matter how valuable (thats how come their ICBMs, submarines, Sukhoi 35s etc have not all been carried off by the mob). Then how as a practical matter does the mob get their hands on the gold?

Hijack a military ship under escort? Good luck. Then which port do you sail it to? How do you keep control of it during the days at sea as you sail to that port?

If the Russians can secure they military equipment worth billions they can secure this.

@Gabriel
Agree wholeheartedly. There are few actual threats to such a shipment. While a few countries may have a motive to sabotage it, the risks of such an act are probably too great.

From a purely security standpoint I think moving the gold in one big shipment or just a few big ones, is probably safer than breaking it up into many small shipments.

I think the threats increase as the shipment size decreases. More actors become capable of attacking each shipment. Assuming that the level of security is commensurate to shipment size i.e you can run a convoy of military ships for 200T of gold but as shipment size decreases your willingness to do so will also decrease.

"If one takes the attitude you do how can you then explain that Russia is able to keep anything of value out of the hands of the mob?"

Easy. All the stuff and situations you mentioned are assets that belong to Russia and have great strategic/economic value to them. The gold is Venezuelan and only benefits Russia a little if transfered properly, but by billions if stolen. The mob won't do anything major against Russian gov.'t assets because that will break the profitable partnership and make the mob a target. Them jointly robbing Venezuela only helps Russia, except for political ties with Venezuela. (How important is that exactly?)

"The idea that the Russian govt would simply take Venezuela's gold is just imagination. The idea that a rogue military faction would do this on behalf of say the mob is a really remote possibility."

Hardly. It is speculative, but they have a few billion reasons to consider it. ;) The question is how would they do it. They might cause an "accident" that drops the load into a non-cooperative country, which is actually cooperating. They might put it on a boat, have an identical one with some British gold stored similarly secretly sent out, sink the secret one and bring the other back. The evidence would point to US, Britain or Israel. The documentation would be fudged to make sure the right serial numbers or boat was there. Hell, if it's long-term, they could secretly build a boat just for this over time. It would be worth it. ;)

Then there's state-sponsored hijacking. Again, they'd point in the direction of a powerful terrorist organization doing it for financing, an enemy of Venezuela, or high end organized crime. The vehicle(s) was hijacked by well-prepared pro's and diverted to a neutral location. The gold was unloaded before anything could be done. Who knows were it's at now. (Except a few officials in the "neutral" location who were paid well to feign ignorance.) Look at the success of the PLO's British Bank of Middle East robbery or Sadaam raiding Iraq's central bank for $1 billion before the bombs dropped. With a heist this big, expect similarly capable organizations to consider it.

These kinds of subversions aren't uncommon in the espionage field. US, Britain, Israel and Russia were the most accomplished at those things. US considers Chavez an enemy of the state & probably has active covert operations against him. Britain & Israel stick with US on these things most of the time. All three are believable saboteurs or fallguys. And Russia has $12 billion in certified gold to gain by subverting the transfer. (Heck, THEY don't even have to do it. Just a select few allow a third party to do it in agreement for a cut of the profits.) Altogether, the amount being moved and parties involved make me think a theft or DOS are worth considering deeply.

He said he wants to deposit part of that gold in russia and china.
So let them handle the transfer for a fee, bet it won't be very high.
The expression of trust, the simple gesture will make it worth to them. Military ships visit "friends" all the time.
Gonna rob/sink a russian/chinese (military-) convoy?
That is WW3 stuff right there, noone is going to go there.

That's taken care of the outside threat,
internal subversives?
Having those two together in on it, they will take care of it, because there is no way they will allow to fsck each other over.

That said...
12 billion is peanuts, not worth all this cranial excersion.
Banks each push out more bailout/0%-loan-money out each year to their exes in bonuses.

Carlo said it already, Chavez is afraid the possibility of a mandatory freeze and then redistribution for the opposition to arm hemselves or buying media slots/simpazies.

By the way, I found that the UN has been very loose to that lately on those transactions lately, to say the least. If anything, assets can be freezed and when turmoil settles giving it back to the coffers of whatever well established government is in place for at least 2 years. Any sort of that is simply misappropriation or stealing.

I think people are focusing too much on the actual transportation and too little on the audit trail.

Presumably a very important consideration for Chavez is to be able to convincingly point the finger at the Bank of England or the Shipping fleet or whoever if the gold doesn't all show up or is mixed with less valuable metals. If Chavez uses his own ships and the bank of england defrauds him everyone will assume his own military did the stealing.

On the other hand he may not want an audit trail that will stop him from blaming england after he replaces a bunch of the gold with lower purity bars.

I don't like to go where I'm unwelcome, and I won't be bothering this community any more. However, you've contradicted yourself: In a previous warning about not linking to my pages in comments, you reassured me that I could still use the URL field as so many others here do: to link to their own blogs, websites, commercial businesses, and other forms of self-promotion. I complied. (I do *not* own or administer that domain; it hosts thousands of other writers and has more than 100,000 pages. I gain no monetary or other tangible benefit.)

If the value of gold was O/T, then of course you should delete all such posts. The fact that one quotes one expert's writings (one's own), vs. another expert's writings, seems irrelevant. Of all the gold-writers here, you singled out the one who, AFAIK, is most qualified to speak about it (MBA in Economics and 20+ years in the trenches, not in the ivory tower.)

Studies and empirical evidence show that information conveyed with a memory hook, such as humor, is more readily absorbed and persists longer than rote or other more traditional methods. I put this to good use.

I saw no reason to re-state, in different words, what I had already written, and which was well-received by a lay audience. This is why the "copy" and "paste" commands were invented. Bruce does it in the post, and many commenters copy and paste from their sources, or link to them. Were I Joanna Rutkowski or Matt Blaze, would I be forbidden from linking to, or copy/pasting, my own writings? Think of me as a Matt Blaze (or Bruce Schneier) of economics, esp. with reference to the world's experience with and without a gold standard of currency.

Please don't go to the effort of an IP ban. Aside from the fact that you know they're avoidable, if I say I won't be back to comment, I won't be. I'm sure that my opinion doesn't matter, but I did want to say that I think that aside from receiving conflicting and contradictory messages, I've been singled out unfairly.

My offer to proofread Bruce's book, which was based on also being an expert and experienced proofreader and copy-editor, who reviews contracts where hundreds of thousands of dollars may ride on a single clause or even a single punctuation mark, and who found so many errors in Neil Stephenson's "Cryptonomicon" that at one point, his publisher and I discussed the possibility of my free-lancing for them in that capacity, is hereby withdrawn.

In closing, I regret that overall, the stereotype of geeks as being utterly humorless seems to have a great deal of validity. Best of luck to Bruce with all of his work and books.

I think Chavez's mission requires that he actually move the Gold that is specifically at BoE. His motivation is to secure his assets against legal attack.

Taking physical delivery of tons of Gold accomplishes this mission.

He might further have a motivation to test his trading partners and this move forces them to show their cards and prove that they actually have the physical assets they have been trading.

While Gold is fungible, there is a significant cost to bringing in such a large quantity of metal from multiple sources, assaying it or doing non-destructive testing, and moving it to its final location.

In short, he will "lose" a fraction of the Gold to theft, cheating, frictional costs, or insurance, no matter choices are made.

So I propose this scheme:

1. Utilize BoE employees and Venezuelan personnel to inventory the material, containerize it and prep for shipment. Use a combination of GSA-grade tamper-evident seals, chain-of-custody and electronic monitoring to help mitigate the risk of theft en-route.

2. Transport the containers to a London airport and load them onto a Boeing 747 cargo plane.

3. Require that high-ranking U.K. bank personnel ride along on each flight to complete the chain of custody and increase the motivation of the U.K. government and allies to help safeguard the mission.

4. Use two identical planes for each mission. One would be a "chase plane" whose job it is to follow the first aircraft and ensure it reaches its destination. It would also be able to follow it with a security detachment and container handling equipment.

If the primary plane is forced to make an emergency landing, the material could be transferred at that point and the mission would continue on with minimal interruption.

It also prevents the first plane from "disappearing" without collusion between two separate crews. The "transport" and "chase" planes would not be chosen until the Gold arrives at the airport.

Utilizing such an aircraft has several advantages.

1. The 747 has a cargo+fuel capacity of approximately 400,000lbs, so the shipment could be made non-stop and in a relatively small number of trips.

2. This aircraft has been in continuous passenger service since the 1970s. It has an excellent safety record, and the risks of flying it non-stop to Caracas are well known and insurable.

3. Using a high-altitude passenger aircraft mostly precludes the possibility of a container being "lost over the ocean" by the crew or similar versus using a C130 or other military aircraft that is designed to air-drop things.

It's also reduces the number of players in the world with the capability of intercepting it after take-off.

4. The aircraft could be chosen at random from a large pool of available planes worldwide, with little notice. This increases the difficulty of an enemy sabotaging the equipment.

Once the cargo arrives in Caracas, the containers would then be off-loaded, counted and weighed. The seals and monitoring devices would be audited by a separate Caracas-based crew.

At this point the bank personnel could be sent back to London, along with a different Venezuelan crew for the next mission.

At Caracas, the material would be loaded onto trucks and transported with a military escort to their final resting place. A final check of the seals would be made by another, independent crew and the Gold would be put away.

Also, its important to insure the cargo with a U.K. insurer. This aligns the risk with the party who can mitigate it, making this an "all U.K." problem until the cargo arrives.

Should the plane make an emergency landing in a third country, it could be "detained" by a government with claims against Venezuela.

By having U.K. personnel on board and a U.K. firm insuring the risk, diplomatic pressure could prevent this.

Some of the risks could be further diluted by flying a certain number of missions with containers filled with dead weight.

Doing this prolongs the delivery process however, and provides more time for an enemy to plan an attack or for insiders to practice a scheme or collude.

So I think the plan with a small number of flights and a short mission window is best.

I agree with lbr -- some commenters (and indeed, the author of the article linked in Bruce's post) have greatly exaggerated the risks and challenges of the proposed transfer.

Obviously, gold is extremely attractive as a theft target (mainly due to its handiness for transport, the ease of disguising its origin, and the ability to sell stolen gold at or near market value).

But I see no basis, for supposing that Venezuela's proposed transfer poses unique hazards or challenges -- certainly not requiring fanciful James Bond schemes!

Consider:

1) The gold transfer can (and quite likely will) be divided into small shipments, for which the loss exposure is managable (say, 0.2% of Venezuela's GDP). If someone hopes to make a guns-blazing theft, and then cart away a ton of metal without getting caught ... how likely is this to succeed repeatedly? Self-insurance would probably make much more sense than paying a 3% premium.

2) Air freight shipments often include small packages of great value. In certain cases, semiconductors, gems or pharmaceuticals have sufficient value, that many tens of millions of dollars worth can fit into a small road vehicle. They're not as easy to sell as gold, but certainly are high-value targets. And they are safely shipped every day.

3) $12-13 billion may seem like a huge amount of money, but an equal value of goods are shipped across international borders several times each day.

4) Much of the world's gold production is in very poor countries, which presumably retain little or none of it. So there is a constant stream of gold shipments! Each year, South Africa (a country terribly afflicted by poverty and crime) exports more gold than Venezuela proposes to move -- probably most of this gold is carried great distances, and across oceans. How often do you suppose this South African gold is stolen? And if it can be shipped successfully, what is it about Venezuela's situation that makes the problem more difficult?

Bear in mind that billions of dollars of diamonds are also transported annually, over great distances and usually through areas of high crime and civil unrest. Diamonds come close to gold in attractiveness as a theft target.

I don't suggest that the Venezuelan gold transfer isn't a security challenge -- the officials involved can follow the normal security practices used daily all around the world, for shipments of valuable cargo.

In fact I did delete lots of other comments on the value of gold, not just yours. Yours was much worse than most because your lengthy cut-and-paste contained over-the-top language that was likely to lead the discussion even further off-topic. I'll just quote the relevant paragraph -- with a request to everyone else to please not respond to this:

"John Maynard Keynes, the Anti-Christ of economic, and therefore human, freedom, called gold a "barbarous relic". (He also said in the 1936 German edition of his book that his policies "can be much easier adapted to the conditions of a totalitarian state .... than .... under conditions of free competition." Later, he disavowed Nazism. "Be careful what you wish for. You might get it." You wished for a totalitarian state in Germany; you got one, John-boy. Don't play innocent with us.)

Again, this was a cut-and-paste; you didn't just get hot under the collar about a pet issue, you inserted pre-prepared flamebait into your comment.

But of course, I didn't ban the song parody site just because of one comment. I did that because you repeated behavior you'd been warned about. After my first request to stop mentioning that site didn't work, I gave you a very explicit warning: write your comments as if those pages don't exist.

You can't cut-and-paste from pages that don't exist. It's not ambiguous.

I'm sure you think I was unfairly singling you out by telling you to quit talking about that site in the first place, and I doubt I'll change your mind on that, but I will say that I am confident no one else on this blog has ever managed to work their own non-security writings into the conversation more than thirty times without being banned outright.

The shipment must go by air, it seems to me. Any other transport mode allows too much time for other "competing" nation-states to inact 3rd party subterfuge -- the goal if which is to simply fatally disrupt the shipment, not take possession. High-altitude aircraft are simply too visible to mess with along with creating a significant hurdle simply due to the altitude.

I don't see foreign nationals being willing to undertake this mission to fly into Venezuela, so locals would need to fill out the crew. Use various anti-espionage countermeasures (random crew assignments, hold them incommunicado) -- and then just send the gold unannounced during one of the many "training dry run" shipments.

Furthermore, encourage the crews to actively search for security holes & give $1000 bounties during the "dry" runs. When all real risks have been mitigated, announce "3 final runs, double bounty!!!" -- and simply sneak the gold aboard.

I forget the exact number, but I think the flights cost roughly $400k each, so simply run an actuarial calculation to find the correct number of test flights to balance out the risk.

@MarkH:
"4) Much of the world's gold production is in very poor countries, which presumably retain little or none of it."

This is not entirely true. Of the 15 largest gold producers in the world, 9 of them (60%) are among the top 15% of richest countries in the world and all but 2 are in the upper 50%. For both those 2 (PNG and Mali), the much smaller gold industry is almost entirely managed by foreigners, with the national government just picking up the royalty checks.

"So there is a constant stream of gold shipments! Each year, South Africa (a country terribly afflicted by poverty and crime) exports more gold than Venezuela proposes to move -- probably most of this gold is carried great distances, and across oceans. How often do you suppose this South African gold is stolen?"

Very frequently, on a massive scale. It's a huge problem; the industry itself regards it as a crisis. For obvious reasons the estimates vary widely, but the lowball is 10% of total production, and some estimates are just under 20% of total production. Amounts actually recovered by police and "private security firms" seem to be about 1% of those figures but growing at ~20% p.a., and they seem to have stopped publishing the figures. Arrests of gold thieves were well over a thousand persons p.a.

Thanks, "8 ℨ" for the information concerning South Africa. It seems to me that the majority of theft is from the mines themselves, and not directly relevant to Venezuela's situation. I was discussing gold shipments.

How much of South Africa's gold is stolen between the mines and the air or sea ports from which it leaves the country? And how much is stolen enroute from South African ports to the destination countries? This would be more applicable to Venezuela's planned gold transfer.

Your comparisons between those valuables that were shipped and the Venezuelan gold are apples to oranges. The reason is that the Venezuelan gold contains an additional threat: nation states. Adding nation states to the mix changes a lot. So let's look at your argument below in that context.

So, could this be said of anything that has been compromised by a nation-state effort? Well, tons of pipelines and control rigs have been safely shipped & installed. This didn't stop us from subverting & exploding the Siberian pipeline. Hundreds of thousands of messages were securely delivered to German and Russian agents, until Ultra and VENONA projects changed this. Nuclear enrichment plants & reactors are operated all over the world in spite of activist attacks & efforts, yet the Stuxnet team managed to take Natanz out of the picture for a while. So, throw a determined, sophisticated nation-state in to the mix with plenty of resources & statements like yours either no longer apply or must be reconsidered thoroughly.

"the officials involved can follow the normal security practices used daily all around the world, for shipments of valuable cargo."

That's a start. I actually like Arclight's idea of putting UK elites and insurers on board to increase odds of their cooperation. The random selection of a plane helps so long as the selection is "truly" random as opposed to "apparently" random. The latter is still a possibility. Seals aren't enough. Castro's most trusted people should be allowed to guard the shipments, with both on-site and remote monitoring. Otherwise, the seals alone must resist any sophisticate attacks. I prefer combining strong personnel security with technological security.

Let's assume for the sake of discussion, that some state(s) consider it worthwhile to attack a gold transfer totaling less than 4% of Venezuela's GDP.

If the insurance premium would be 3%, and Venezuela chose to self-insure, then it could (at break-even) budget almost $400 million for the total of expected losses plus extra security measures.

The transfer can easily be divided into shipments of a ton or two (I see no obstacle to making them even smaller), in which case a completely successful attack against a shipment would impose a loss of less than 1%. Unless such attacks can be expected to succeed repeatedly, their effect would be rather modest.

As to tampering/fiddling, gold can be very precisely assayed at modest cost: tampering must be either tiny in its effects, or else readily detectable.

Venezuela could (if it wanted to) provide escorts, use special high-security containers, provide guards at both ends, and employ private detective forces to actively scout for any interference -- all costing just a fraction, of the presumed $250+ million security budget.

If they wanted to have some fun, the officials responsible for the transfer could throw in a few thousand decoy shipments -- what's to stop them?

I still think that there is a highly magnified perception of the hazard here. It seems to me that the use of normal precautions for valuable commercial shipments (which, I am confident, include some low-profile added safeguards) would suffice. If Venezuela uses standard airfreight, the transfer will be effected reliably and efficiently.

It's seems quite workable if we make the shipments small, guard them, and add in decoys. The US has shot down a large airline before & has plenty of ways to take down ships deniably. So, this makes me think a large British aircraft is the best route. We could use two or three. The containers would be loaded in a tent set up in such a way to conceal which one the gold was put on and it's randomly determined on the spot. The drivers & pilots would be trusted Venezuelans. Decoy drivers would be told to drive as if they had a heavy gold. It could work.

I get email from Nigeria and other countries about large amounts of money that needs to be shipped across the ocean all the time! Just send out a bunch of emails, and you'll find some willing participant who will get the move done for a small percentage.